How to determine if you need to worry about estate taxes

Joe Giordano
partner
Whisman Giordano
 

Among the taxes that are being considered for repeal as part of tax reform legislation, is the estate tax. This tax applies to transfers of wealth at death, hence why it’s commonly referred to as the “death tax.” Its sibling, the gift tax, which is also being considered for repeal, applies to transfers during life. Yet, most taxpayers won’t face these taxes even if the taxes remain in place.

Exclusions and exemptions

For 2017, the lifetime gift and estate tax exemption is $5.49 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, then no federal estate tax will be due.
Any gift tax exemption you use during life reduces the amount of estate tax exemption available at your death. Every gift you make won’t use up part of your lifetime exemption. For example:

• Gifts to your U.S. citizen spouse are tax-free under the marital deduction. (So are transfers at death — that is, bequests.)

• Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.

• Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.

• Each year you can make gifts up to the annual exclusion amount ($14,000 per recipient for 2017) tax-free without using up any of your lifetime exemption.

What’s your estate tax exposure?

Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (Keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number you end with represents your taxable estate.

You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted.

If your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).

If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. If your taxable estate exceeds this amount, the excess will be subject to federal estate tax.

About the author 

Joe is a 2004 graduate of Mount Saint Mary’s University, with a bachelor’s degree in accounting. He is also a 2000 graduate of Archmere Academy in Claymont, Delaware. Joe started with the firm in 2002 as a part-time intern, joining full-time in 2004.

Since then, he has worked with a myriad of clients, including entrepreneurial firms, agricultural businesses and nonprofit entities, including those with OMB A-133 audits. Joe, along with the firm, contributes to Toys for Tots, Goodwill Industries, as well as several other community organizations. He is a member of the American Institute of Certified Public Accountants and the Delaware Society of Certified Public Accountants.

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